The Initial Meeting With a Mortgage Professional

The loan approval process generally begins with an initial interview where the prospective home-buyer and the mortgage professional meet to discuss the potential loan.

Often people prefer to meet with the mortgage company before house hunting to determine in advance what price range they can realistically afford and the mortgage amount for which they can qualify. This step is called pre-qualification.

For your first meeting with the mortgage company, you should bring:

• A purchase contract for the house (if you have one)
• Your bank account numbers and the address of your bank branch, along with checking and savings account statements for the previous 1-2 months
• Pay stubs, W2 forms
• Divorce settlement papers, if applicable
• Information on other consumer debt such as car loans and student loans
• Balance sheets and tax returns, if you are self-employed
• Any gift letters, if you are using a gift from a parent or relative or other organization to help pay the down payment and/or closing costs. This letter simply states that the money is in fact a gift and will not have to be repaid.

Having these items on hand when you visit the mortgage company will help speed up the application process. Usually an application fee and the appraisal fee will have to be paid when you submit the mortgage application. This is only done after you have successfully negotiated on a home and have had your offer accepted by the seller. Generally, there is no fee for pre-qualification.

Two Key Factors in Qualifying for a Home Loan

In attempting to approve home buyers for the type and amount of mortgage they want, mortgage companies basically look at two key factors: the borrower's ability and willingness to repay the loan. Ability to repay the mortgage is verified by your current employment and total income. Generally speaking, mortgage companies prefer for you to have been employed at the same place for at least two years, or at least be in the same line of work for a few years. The borrower's willingness to repay is determined by examining how the property will be used and how you have fulfilled previous financial commitments. Each applicant is handled on a case-by-case basis.

Mortgages and Credit Reports

Credit scoring is a statistical method of assessing the credit risk of a loan applicant. The score is a number that rates the likelihood an individual will pay back a loan. The score looks at the following items: past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit, number of inquiries.

BC Mortgage lending gets its name from the grading of one's credit based on such things such as payment history, amount of debt payments, bankruptcies, equity position, credit scores, etc.

A Credit Profile refers to a consumer credit file, which is made up of various consumer credit reporting agencies. It is a picture of how you (as an individual) paid back the companies you have borrowed money from, or how you have met other financial obligations.

There are usually five categories of information on a credit profile:

• Identifying Information
• Employment Information
• Credit Information
• Public Record Information
• Inquiries

What is NOT included on your on a credit profile:

• Your race
• Your religion
• Your health
• Your driving record
• Your criminal record
• Your political preference
• Your income

You can be better prepared if you get a copy of your credit report to review before you apply for your mortgage. That way, if there are any errors you can take steps to correct them before you make your application.

The Fair Credit Reporting Act (FCRA) outlines specifically who can see your credit profile. Businesses must have a "legitimate business need," and a "permissible purpose," as stated in the federal law to obtain your credit file. Any company that receives a copy of your credit profile will be listed under the "Inquiry" section of your report. You also have the right, under the Fair Credit Reporting Act, to dispute the completeness and accuracy of information in your credit file.

Low Down Payment Loans

Simply put, mortgage insurance protects the mortgage company against financial loss if a homeowner stops making mortgage payments. Mortgage companies usually require insurance on low down payment loans for protection in the event that the homeowner fails to make his or her payments. Remember that mortgage insurance is not the same as credit life insurance, also called mortgage life insurance. This type of policy repays an outstanding mortgage balance upon the death of the person who took out the insurance policy.

The Two Choices: Government Insurance and Private Insurance

Low down payment mortgages can be insured in two ways -- through the government or through the private sector. Mortgages backed by the government are insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) or the Farmers Home Administration (FmHA). Obtaining conventional financing is the alternative to obtaining a home loan backed by the government. Conventional mortgages are all home loans not guaranteed by the government, including those guaranteed by private mortgage insurers.

Private mortgage insurance is available on a wide variety of home loans and there is no pre-set limit on the loan amount. Although differences such as these may affect whether the mortgage company prefers to work with government or conventional mortgages, your mortgage professional will discuss which one would be better for your situation.

Loans and gifts can help with your down payment but you can not use this strategy for all loan programs. The most popular program for this tactic is the Federal Housing Administration or FHA. FHA allows 100% gift funds for your down payment. The gift can be from any relative or can be collected through new innovative programs, like the Bridal Registry where couples receive money into an account that can be used for the down payment. Another popular tactic, which can be used in a wider range of programs, is to borrow from your 401K program.

To qualify for a low down payment loan, you generally need to have:

* Sufficient income to support the monthly mortgage payment
* Enough cash to cover the down payment
* Sufficient cash to cover normal closing costs and related expenses (explained below)
* A good credit background that indicates your payment history or "willingness to pay"
* Sufficient appraisal value, which shows the house is at least equal to the purchase price
* In some instances, a cash reserve equivalent to two monthly mortgage payments

Closing costs, or settlement costs, are paid when the home-buyer and the seller meet to exchange the necessary papers for the house to be legally transferred. Closing costs include the loan origination fee, points, prepaid homeowner's insurance, appraisal fee, lawyer's fee, recording fee, title search and insurance, tax adjustments, agent commissions, mortgage insurance (if you are putting less than 20% down) and other expenses. Points are finance charges that are calculated at closing. Each point equals 1% of the loan amount.

So How Much of a Mortgage Can You Afford?

There are two basic formulas commonly used to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses. Remember that each application is handled on an individual basis.

Generally speaking, to qualify for conventional loans, housing expenses should not exceed 26% to 28% of your gross monthly income. For FHA loans, the ratio is 29% of gross monthly income. Monthly housing costs include the mortgage principal, interest, taxes and insurance, often abbreviated PITI. Any expenses that extend 11 months or more into the future are termed long-term debt, such as a car loan. Total monthly costs, including PITI and all other long-term debt, should equal no greater than 33% to 36% of your gross monthly income for conventional loans. For FHA the ratio is 41%.

* Maximum allowable monthly housing expense
26% - 28% of gross monthly income - Conventional
29% of gross monthly income - FHA
* Maximum allowable monthly housing expense and long-term debt
33% - 36% of gross monthly income - Conventional
41% of gross monthly income - FHA

When budgeting to buy a home, it is important to allow enough money for additional expenses such as maintenance and insurance costs. Homeowner's insurance or property insurance is another cost you will have to consider.

Private Mortgage Insurance

Private mortgage insurance (PMI) is a type of insurance that helps protect the mortgage company against losses due to foreclosure. This protection is provided by private mortgage insurance companies and allows mortgage companies to accept lower down payments than would normally be allowed.

PMI Cancellation - Mortgage insurance can usually be canceled by the home-buyer after he or she has at least 20 percent equity in the home. Borrowers should contact their servicer to find out the procedure for canceling mortgage insurance when they think they have achieved 20 percent equity. Guidelines for canceling private mortgage insurance are set by investors. Typically, investors will require an appraisal on the property.

PMI Payment Options - Private mortgage insurance can be paid on either an annual, monthly or single premium plan. Premiums are based on the amount and terms of the mortgage and will vary according to loan-to-value ratio, type of loan, and amount of coverage required by the mortgage company.

PMI vs. FHA MIP - Although the insurance protection concept is similar, there are differences between private mortgage insurance and FHA mortgage insurance. FHA insurance is a government-administered mortgage insurance program that does have certain restrictions. FHA has maximum regional loan limits that are lower than those with private mortgage insurance. FHA may be more expensive, take longer to receive approval, and have fewer payment plan options. FHA insurance lasts for the life of the loan, unlike private mortgage insurance which is cancelable in most circumstances.

Escrow Account Basics

Mortgage escrow accounts are special accounts set up in which money is held to pay for property taxes, fire and hazard insurance premiums, mortgage insurance premiums, and other escrow items.

Guarantee that bills are paid on time. Homeowners do not have to worry about coming up with several large, lump sum payments, each with different due dates, throughout the year.

Unexpected increases are taken care of.It is the responsibility of the mortgage company to allow for possible increases in tax or insurance premiums.

Mortgage companies typically cover shortages when tax or insurance payments increase. It is very common for mortgage companies to pay taxes and insurance premiums when they are due even though all the money for these bills has not yet been collected from the homeowner.

Mortgages have lower rates and down payments because of escrows. Escrows protect the interest of investors of home mortgage loans by making them more attractive and secure as investments.

Local governments save money. Escrow accounts also benefit local governments by providing a more efficient, less expensive means of tax collection.

Title Insurance

A policy of title insurance is a contract of indemnity between the insured and the insuring company relating to the title to the land described in the policy, protecting the insured against loss of damage by reason of defects, liens or encumbrances of the insured title existing at the date of the policy and not expressly excepted from its coverage. The policy is issued after a complete search and examination of the public records and shows the condition of the record title, including any money obligations outstanding against the property, easements and other matters which may affect the rights of ownership, possession and use of the property.

Title insurance protects the "record" title, insuring it is good subject only to the exceptions expressly set out in the policy. lt also insures against certain matters which do not appear of record, such as forgery, identity of parties, incompetence of former owners, interest of missing heirs, and status of individuals not having the "right" to sell property. There are different types of policies. Owners policies are issued to real estate owners. Purchasers policies are issued to purchasers of real estate under contract. Mortgage policies are issued to mortgage companies. In addition there are several other special forms of policies. There is a type of policy to meet the requirements of almost any form of real estate transaction.

Homeowners Insurance

When you insure your home, you should insure your home for the total amount it would cost to rebuild your home if it were destroyed. If you don't have sufficient insurance, your insurance company may only pay a portion of the cost of replacing or repairing damaged items.

For a quick estimate of the amount to rebuild your home, multiply the local building costs per square foot by the total square footage of your house. To find out the building rates in your area, consult your local builders association or real estate appraiser.

Also be sure to check the value of your insurance policy against rising local building costs each year. Ask your insurance agent or company representative about adding an "INFLATION GUARD CLAUSE" to your policy.

12 Ways to Save Money on Homeowners Insurance - mortgage101.com

Flood Insurance

Flooding is not covered by a standard homeowners insurance policy.

To determine if you need flood insurance, ask your insurance professional, mortgage company or neighbors about the flood history in your area. If there is a potential for flooding, you should consider purchasing a policy that covers the structure and your personal belongings.

Appraisal Basics

The majority of real estate appraisals are requested by mortgage companies to validate the property's purchase price for loan purposes. An appraisal of real estate is the valuation of the rights of ownership. The appraiser must define the rights he intends to appraise. The appraiser interprets the market to arrive at a value estimate. This estimate is derived by using three common approaches, all derived from the market. They are:

1. Cost Approach to value is what it would cost to replace or reproduce the improvements as of the date of the appraisal, less the Physical Deterioration, the Functional Obsolescence and the Economic Obsolescence. The remainder is added to the Land Value.
2. Comparison Approach to value makes use of other "bench mark" properties of similar size, quality and location that have been recently sold. A comparison is made to the subject property.
3. Income Approach to value is of primary importance in ascertaining the value of income producing properties and has little weight in residential type properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces.

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This educational series is created to allow Realtors to obtain continuing education. The articles are intended for general informational purposes and are not to be construed as legal advice or legal opinion on any specific facts or circumstances. You are advised to consult with an attorney concerning any questions about your rights or responsibilities in any specific situation.